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United Air Lines is set to move its operational headquarters, starting this year, from the Illinois suburb of Elk Grove to downtown Chicago. Quicken Loans, also citybound, recently began leasing space in Detroit and plans to build its headquarters there. And in February, Walgreens announced its acquisition of New York drugstore chain Duane Reade, signaling a deliberate decision to improve its capabilities in urban settings.

These companies are getting a jump on a major cultural and demographic shift away from suburban sprawl. The change is imminent, and businesses that don’t understand and plan for it may suffer in the long run.

To put it simply, the suburbs have lost their sheen: Both young workers and retiring Boomers are actively seeking to live in densely packed, mixed-use communities that don’t require cars—that is, cities or revitalized outskirts in which residences, shops, schools, parks, and other amenities exist close together. “In the 1950s, suburbs were the future,” says University of Michigan architecture and urban-planning professor Robert Fishman, commenting on the striking cultural shift. “The city was then seen as a dingy environment. But today it’s these urban neighborhoods that are exciting and diverse and exploding with growth.”

Why Such a Major Shift?

The change is about more than evolving tastes; it’s at least partly a reaction to real problems created by suburbs. Their damage to quality of life is well chronicled. For instance, studies in 2003 by the American Journal of Public Health and the American Journal of Health Promotion linked sprawl to rising obesity rates. (By contrast, new research in Preventive Medicine demonstrates, people living in more urban communities reap health benefits because they tend to walk more.) Car culture hurts mental health as well. Research by behavioral economist Daniel Kahneman and his team shows that out of a number of daily activities, commuting has the most negative effect on people’s moods. And economists Bruno S. Frey and Alois Stutzer have found that commuters who live an hour away from work would need to earn 40% more money than they currently do to be as satisfied with their lives as noncommuters.

A recent report sponsored by Bank of America, the Greenbelt Alliance, and the Low Income Housing Fund examines the inefficiencies of the current “geographical mismatch between workers and jobs.” Focusing on California, it says that sprawl “reduc[es] the quality of life,” “increase[s] the attractiveness of neighboring states,” and yields “higher direct business costs and taxes to offset the side-effects of sprawl”—which include transportation, health care, and environmental costs.

The Unintended Consequences of Cul-de-sacs

Though suburban cul-de-sacs have long been attractive as quiet, safe places for families, their disadvantages are becoming clear. One of the biggest problems is interference with motor- and foot-traffic flow. Research by Lawrence Frank, Bombardier Chair in Sustainable Transportation at the University of British Columbia, looks at neighborhoods in King County, Washington: Residents in areas with the most interconnected streets travel 26% fewer vehicle miles than those in areas with many cul-de-sacs. Recent studies by Frank and others show that as a neighborhood’s overall walkability increases, so does the amount of walking and biking—while, per capita, air pollution and body mass index decrease.

Last year, the Virginia legislature took action against the municipal costs of cul-de-sacs and passed a law limiting them in future developments; the new policy was highlighted in the New York Times Magazine’s “Ninth Annual Year in Ideas.” Along with such moves to more-accessible street systems will come an economy that rewards businesses’ proximity to customers and employees. —A.W.

About the Maps

These images compare a one-kilometer walk in the Seattle suburb of Woodinville with one in Seattle’s Ballard neighborhood. The former is limited by a disconnected street network and few destinations within walking distance, while the latter offers easy access to parks and shops.

Solving problems like these is on the Congress for the New Urbanism’s agenda as the group holds its conference this month in Atlanta, fittingly cosponsored by the Centers for Disease Control and Prevention. As the CNU’s charter explains, proponents of New Urbanism, an architecture and design movement, advocate for “neighborhoods…diverse in use and population” and “communities…designed for the pedestrian and [public] transit as well as the car.” Max Reim of the urban-planning firm Live Work Learn Play describes the model by alluding to Starbucks’s creation of a “third place” for consumers, away from home and work. New Urban centers deliberately put all three places in close proximity, he says, with plenty of room for pedestrians and bikes. Houses are on the same streets (often in the same buildings) as shops; trains and parks are within walking distance from home.

How Companies Can Benefit

In the last U.S. census, almost two-thirds (64%) of college-educated 25- to 34-year-olds said they looked for a job after they chose the city where they wanted to live. That suggests that businesses like Quicken Loans are on to something: Move in and help build up urban neighborhoods, the argument goes, because that’s what will draw the talent.

Almost 64% of college-educated 25- to 34-year-olds said they looked for a job only after they’d chosen the city where they wanted to live.

For example, CEOs for Cities president Carol Coletta says that by supporting education in cities, companies not only help improve the prospects of entrants to the workforce but also enhance the overall value of the city and hence its attractiveness as a place for people to live and work. CEOs for Cities research suggests that increasing the proportion of residents with four-year-college degrees in the 51 largest metropolitan areas by only one percentage point would be associated with a $124 billion spike in aggregate annual per capita income.

n 1990, college-educated 25- to 34-year-olds were 12% more likely than others in the U.S. to live within three miles of a central business district. By 2000, they were 33% more likely.

“Increasingly CEOs understand that without a vibrant central city, their region becomes less competitive,” says Coletta. “Good CEOs care about the fate of their cities, because they have to question whether that is the place where they can attract the talent they need.”

A shift to an urban model affects corporate strategy—especially for retail businesses currently thriving in strip malls on busy commuting arteries. Firms base many decisions on store locations and the types of customers served, and a move to the city changes both. Cheri Morris, CEO of the New Urban design firm Hedgewood Commercial Properties, warns that the rigid criteria for national chains’ store locations—such as deep buildings and interstate visibility—often render them unable to conform to the aesthetic or logistical requirements of New Urban developments, leaving them locked out of such areas entirely. Even in more traditional urban areas, big-box stores are forced to configure their familiar floor plans into narrower, multilevel spaces.

A Cautionary Tale from the Last Big Shift

The story of 7-Eleven, a classic case from the shift to sprawl, shows how major changes in community planning can affect business.

“Southland Company [7-Eleven] didn’t read the spatial patterns and lost its market niche as a result,” says New Urbanist planner Peter Katz. He told HBR that U.S. cities used to have a dozen levels in their road hierarchy, ranging from residential streets to interstates. The strategy at 7-Eleven was to build on streets between residential and commercial areas. But once sprawl took over, many of those options vanished. So 7-Eleven was forced into larger shopping sites, next to stores like Target, which learned its game of late hours and convenience items.

Meanwhile, the chain’s model continued to thrive in Japan, where people still walked everywhere. It did so well that 7-Eleven was bought by its largest franchisee, Ito-Yokado. —A.W.

Marketing changes, too. In densely packed, walkable centers of living, “many of the benefits of costly national branding go away, while the benefits of passion and a close connection to the customer emerge,” says Peter Katz, the head planner for Sarasota County, Florida. In such settings, he and other New Urbanists believe, it’s easier for small, local, experience- and relationship-based businesses to thrive, and indeed many New Urban developers seek merchants like these to populate their newly minted commercial areas. Bigger retail companies will have to work hard to adopt strategies that take New Urban principles into account and learn to provide an authentic “local” experience.

In many ways, New Urbanism and the trends it captures are part of broader recent changes businesses already accept: the shift to an experience economy, consumers’ and employees’ demands for greater corporate social responsibility, an emphasis on work/life balance, and the importance of interaction between companies and their customers. The demographic aspect is simply the newest part of an ongoing conversation. Companies that recognize the larger trend, however, and seize the opportunities that it presents will contribute to its social impact—and may gain a competitive advantage in the process.

A version of this article appeared in the May 2010 issue of Harvard Business Review.